Examination of Witnesses (Questions 80-99)
23 JUNE 2004
MR DAVID
YOUNG AND
SIR HOWARD
NEWBY
Q80 Jonathan Shaw: Including the chairman.
What do those bonuses total?
Mr Young: I would have to put
a note on the total.[6]
They varied in terms of percentage of salary, I think, between
relatively low amounts, like 3%, up to 100%.
Q81 Jonathan Shaw: 100%?
Mr Young: Yes. Throughout the
company, as a whole, I think of the order of 70 staff were within
a bonus scheme of one kind or another, which will include the
executive directors and senior staff.
Q82 Jonathan Shaw: This is not very good,
is it?
Mr Young: I have gone as far as
I feel able to go in making plain that I have some personal unhappiness
about what I now believe to have been the case.
Q83 Jonathan Shaw: So 70 people in this
company that really was not performing, to say the least, were
all receiving up to 100% performance related bonuses. That is
what we have here. I do not know if Sir Howard has a comment.
Sir Howard Newby: As I said, first
of all our concern was with the governance of the Opco board.
There was a properly constituted remuneration committee which
determined the contracts and bonuses payable to the directors
and other employees of the company. We had, through HoldCo, insisted,
as a condition of grant, that the operating company abide by best
practice with regard to the governance of a commercial company,
and we are satisfied from the structures they set up that that
was indeed the case. I have to say to you I was unaware of the
nature of the bonus scheme that the remuneration committee and
the board had endorsed, and I share my chairman's view that the
outcomes are not ones we feel very comfortable with.
Mr Young: Can I just make a correction?
I have looked at the note I have here. Of 75 employees, 31 were
eligible for bonuses, and the actual ones paid ranged from 10-50%
but the possibility of it going as far as 100% would seem to have
been there in some cases.
Q84 Jonathan Shaw: Did you have a conversation
with the chairman and chief executive about this?
Mr Young: I have had no such a
conversation.
Q85 Jonathan Shaw: Sir Howard?
Sir Howard Newby: No.
Mr Young: Bear in mind that the
chairman of the operating company stood down when we communicated
the decision of the HEFCE board to him.
Sir Howard Newby: We certainly
had conversations with our legal advisers about these payments.
Q86 Jonathan Shaw: Did you have a conversation
with the Secretary of State?
Sir Howard Newby: I have not,
no.
Mr Young: No.
Q87 Jonathan Shaw: Do you think you should
have done?
Sir Howard Newby: Our legal advice,
to repeat, was that these were, as a matter of law, payable. We
had no real choice in the matter. In that respect I am not quite
sure what form the conversation with the Secretary of State would
have taken. This was a legal obligation, the company had to abide
by the law. I repeat, I think both my chairman and myself find
the outcomes uncomfortable.
Q88 Jonathan Shaw: Mr Young, in your
opening statement you said that this was an ambitious project
and that there were many similar projects that had failed for
a whole host of reasons. Can you tell us what similar projects
there are and for what reasons they had failed? What did you mean
by that?
Mr Young: My recollection is I
did not use the word "similar"; if I did I certainly
did not intend it to mean other e-learning projects of a similar
kind. What I certainly had in mind was in the private sector,
in particular, taking on a venture of this kind, which you could
see to be high risk for a number of factors. Mr Holmes, quite
correctly, drew attention to one of those factors, which was seeking
to do everything within the company itself, which in itself imports
risk. You can look around, as it were, at the landscape of companies
that got it wrong, for whatever reason, and sometimes things happen.
The competition may react in a way that was not predicted and
equally if people do not buy what is put on offer when it is put
on offer, you have a problem which may have been difficult to
predict in advance. That is all I had in mind.
Q89 Jonathan Shaw: I understand. Sir
Howard, when the Chairman suggested to you "Why was this
not given to a collaboration of universities or the Open Universities"
your response was that you had thought through all this and you
did not want any one particular institution or group of institutions
to be in a privileged situation. Some are in more privileged positions
than others, anyway—research funding, for example—so
it is hardly new, is it? That is a bit thin, is it not, really?
Sir Howard Newby: I repeat, we
had a lot of enthusiasm from the sector to be involved in this.
Q90 Jonathan Shaw: You always have enthusiasm
from this sector if there is opportunity to develop cutting edge
research.
Sir Howard Newby: Yes, but the
difference is we have performance in research on which to base
our funding; we did not at the time, and do not now, have any
performance on which to base our funding of this. One of the issues
we were faced with at the time was that those institutions which
had taken the greatest interest in e-learning already, before
the e-University came along, were not necessarily those with the
strongest international brands and those which had the strongest
international brands were not necessarily those which had developed
an interest in e-learning, although many of them expressed a desire
to get into e-learning. The Open University, as I described earlier,
is in a rather different category because it certainly has a brand,
it has an international brand, but it had not actually developed
its distance learning into e-learning. Certainly, whilst the Open
University was invited all the time to be a partner in this we
did not feel we could hand the whole venture over to the Open
University, although that, I repeat, was considered as an option.
Q91 Jonathan Shaw: Why is that though?
Why, if we have an institution like the Open University which
has a proven track record of success, do we feel we have to go
and invent this funny old hybrid in a risky situation?
Sir Howard Newby: If we look at
the institutions worldwide, that were referred to in David Blunkett's
speech at Greenwich, that were already operating in an e-learning
environment, they include universities like the University of
Chicago, the consortium of Western United States state universities—public
universities in the United States—and there was a lot of
discussion at the time about MIT, Princeton and Yale becoming
involved in worldwide ventures with Chicago and with the London
School of Economics. These are major worldwide brands and, in
talking about the commercial market, brand is important in this
field, like any other.
Q92 Chairman: There are rather lesser
known brands that have made a success of e-learning, have they
not?
Sir Howard Newby: Not really,
Chairman.
Q93 Chairman: No? People talk about the
University of Phoenix, for example.
Sir Howard Newby: I will come
back to that. Of the seven institutions referred to in the then
Secretary of State, David Blunkett's, speech as being involved
in this area only two remain today, one of those is indeed the
University of Phoenix. Of course, what is interesting about the
University of Phoenix it's not a pure e-learning organisation;
it is actually a very interesting model of a university which
predominantly focuses on adult learning and which blends conventional
forms of learning—there are bricks and mortar buildings
of the University of Phoenix dotted all around the United States
and elsewhere—supported by e-learning courseware.
Q94 Chairman: It is our job to hold you
to account. That is what this Parliamentary Committee is about.
We have good relations with HEFCE and we call you to account and
we have a familiar pattern of exchange. In this one, the Committee,
listening to what you have said this morning, would absolutely
understand that these things are high-risk and can go wrong and
it is our job to unravel that. Where it becomes scandalous—and
we are representatives of the taxpayer—is on this bonus
thing. People in Huddersfield, my constituency, are very likely
to say to me: "Come on. We can understand that one of these
things went wrong, but for bonuses of 50% and nearly £50,000?"
Bonuses, as most people out there believe, are linked to some
kind of success. Where this becomes scandalous, in a sense, is
the bonus. What on earth was going on? Was not someone in the
system—you can say it was arms' length and all that—whistle-blowing
and saying "Come on"? Was there not anyone saying "Something
is going on, paying bonuses when this thing has not earned one
penny piece"?
Sir Howard Newby: I have some
sympathy with the view that—and I can certainly say this
about my contract, Chairman—bonuses should not be paid out
when there is clear evidence of failure to meet the performance
that was expected. My understanding is that the Opco board felt
it was necessary to construct the kind of bonus scheme it did
in order to attract and retain the kind of talent it required
from the private sector against a public sector salary environment
where, as you know, vice-chancellors are paid below the level
that a chief executive would be paid in an equivalent size company
in the private sector.
Q95 Chairman: How much was the chief
executive paid? What was his salary?
Sir Howard Newby: His salary,
from memory, Chairman—and we can send you a note on this—was
£186,000.[7]
Q96 Chairman: £186,000. That is
a lot more than most vice-chancellors earn, is it not?
Sir Howard Newby: There are a
few vice-chancellors who are paid more than that, but it is at
the upper end of the scale.
Q97 Chairman: At the upper end of the
scale, and a bonus.
Sir Howard Newby: And a bonus,
indeed.
Q98 Mr Turner: There seems to be some
sort of confusion about the Pricewaterhouse report—more
than one report—and a disagreement about what they said
in terms of their advice on who should be the target market. Can
you make those reports available to the Committee?
Sir Howard Newby: I think you
have the powers to ask for them. I do not see why we should not
make them available to you. We will send them to you, Chairman.[8]
Let me say, there is more than one report—you are aware
of that? There was an original PricewaterhouseCoopers' report
which advised on, if you like, the fundamental business model
that was to be adopted. That was then later followed, in 2001,
after the interim management team had been appointed, by a further
PwC report. Indeed, the interim management team was supported
by PwC and that created a further plan which took matters forward.
So there is more than one report, but we will ensure they are
sent to the Committee.
Q99 Mr Turner: Thank you very much. Mr
Young, you said that it was always accepted that this was a high-risk
venture, and later on you said that you made it clear to the Minister—I
think you said "at an early stage"—that it was
a high-risk venture.
Mr Young: I can certainly recall
a conversation with Margaret Hodge, although it was some little
while ago.
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